Mr. Cooper Group (COOP) Q4 2024 Earnings Call Transcript

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Mr. Cooper Group (NASDAQ: COOP)
Q4 2024 Earnings Call
Feb 12, 2025, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to Mr. Cooper Group fourth quarter 2024 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Mr. Cooper Group.

Kenneth A. Posner -- Senior Vice President, Strategic Planning and Investor Relations

Good morning, and welcome to Mr. Cooper Group's fourth quarter earnings call. My name is Ken Posner, and I'm SVP of strategic planning and investor relations. With me today are Jay Bray, chairman and CEO; Mike Weinbach, president; and Kurt Johnson, executive vice president and CFO.

As a reminder, this call is being recorded. You can find the slides on our investor relations web page at investors.mrcoopergroup.com. During the call, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings.

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We are not undertaking any commitment to update these statements if conditions change. I'll now turn the call over to Jay.

Jay Bray -- Chairman and Chief Executive Officer

Good morning, everyone, and thank you for joining our call. Let's start on Slide 3 with a review of fourth quarter results. I'll summarize, pre-tax operating income was $235 million. Operating ROTCE was 15.8%.

Tangible book value grew 12% year over year to $71.61 per share. And our capital ratio was 24.4%. And liquidity was $3.4 billion. I'm exceptionally pleased with these results.

These numbers demonstrate consistent, predictable performance. And what's especially notable is we delivered these results by closing on the acquisition of Flagstar's mortgage banking operations and onboarding 1.1 million customers. This is by far the largest acquisition in our history and one of the largest customer transfers in the history of the mortgage industry. Drilling down into segments, Servicing generated $318 million in pre-tax income, up 39% year over year.

Given the low level of prepayments, we project strong cash flows from our portfolio continuing throughout 2025 and long thereafter. Originations remained resilient despite the sharp sell-off in December, generating $47 million in EBT. Funded volumes grew 38% sequentially significantly outpacing the market, reflecting very strong execution in the correspondent channel. Thanks to the hard work of our correspondent team and the trust of our clients, we have climbed into a top five market share position.

As I mentioned on our last call, our cost structure and retention make us the best buyer of MSRs in all channels. I'd like to comment on some other positives in the quarter. We proudly won the SHARP Gold Award, which is FreddieMac's highest recognition for servicers. This award reflects our commitment to quality, risk management and performance.

Additionally, we helped several of our subservicing partners achieve gold level recognition through the strong performance we delivered on their portfolios. Our master servicing business received an upgrade from Fitch to a one minus rating, which is a huge third-party endorsement. Master servicing is a business which oversees the performance of other mortgage servicers on behalf of securitization and whole loan investors. By providing high-tech solutions and exceptional personal service, our team has earned and sustained the No.

2 position in the market. I'll add that master servicing generates valuable fee income. Mike will share some comments on how fee income is becoming a meaningful part of our revenue story. Finally, we were pleased to see Moody's place our corporate rating on positive outlook.

They commented on the growing strength and scale of our franchise, our strong return on assets and solid liquidity, and they cited our hedge program as a credit positive. Fourth quarter capped an amazing year for Mr. Cooper. And if you'll turn to Slide 4, you'll see that 2024 was the culmination of a three-year journey.

As we all remember, 2022 ended with one of the most severe interest rate shocks on record with the Fed tightening by 425 basis points and mortgage rates more than doubling. This shot created significant turmoil in the industry. We've responded with swift and decisive action to reorient our platforms and our nimble execution put us in a position to anticipate new opportunities. If you go back to our fourth quarter 2022 investor presentation, you'll see a slide entitled, Expecting Cycle Wide Opportunities for MSR Acquisitions, with a chart projecting a steep increase in MSR sales peaking in 2024.

On the call, we explained how originators had bulked up on MSRs, and we're now facing a serious margin squeeze. And we point into strategic divestitures and the ongoing exit of banks as contributing to a supply/demand imbalance. That was a good call and the results speak for themselves. Over the last two years, we've acquired $440 billion of MSRs at cycle wide OAS spreads, including the Home Point and Flagstar transactions and many other pools.

Today, our portfolio stands at $1.5 trillion, representing the loans of over 6 million customers, making us the largest servicer in the U.S. by a significant margin. In fact, we are more than 50% larger than No. 2.

We also took over the lead in subservicing. Our sizable scale and technology advantage has allowed us to generate positive operating leverage and rising returns on tangible equity. With those results don't show you, however, is the momentum we're now experiencing the talent and enthusiasm of our people, the promise of our technology and the depth of our competitive moat. Now, turning to Slide 5, let me wrap up with some high-level thoughts on the outlook.

Given our momentum, we're increasing our ROTCE guidance range to 16% to 20% for '25 and '26, which is higher than our previous guidance of 14% to 18%. Although we are not immune to macro shifts, we have built a balanced model that is resilient in the face of interest rate volatility, and we're also well positioned to manage through a more adverse cycle. Let's talk about what's driving our confidence in the outlook. Investing in our culture is a huge focus for us.

Mr. Cooper has been certified as a Great Place to Work for six years in a row, and we see the tangible results of our high trust culture and record low turnover. A couple of weeks ago, we held a two-day off-site for the company's senior leaders and the energy was incredible. In recent years, we've made tremendous progress improving the customer experience.

But today, new technology is creating a whole new frontier of opportunities to delight and add value. We're exploring several new value propositions for our customers, some of which we plan to implement this year. AI is changing the world, and it may well be that one of the best applications for large language models is in the call center environment. Mike will update you on our AgentiQ rollout, which is generating great reviews from our team members.

And I'll just add that with our Sagent relationship, we are light years ahead of peers on the journey to the cloud and true real-time, anytime processing. To summarize, our strategic direction over the next two years, I'd remind you of the key drivers, which you've seen us deliver on consistently. First, we will stay laser-focused on unit costs leveraging our lead in technology. Second, we'll keep investing in our origination platforms, both DTC and correspondent to generate higher volumes and gain market share.

Third, we'll grow fee revenues by winning new clients for subservicing, master servicing and our other services businesses and by winning a larger share of wallet. And finally, we'll continue to analyze the market for acquisitions in a thoughtful and disciplined manner, looking for opportunities to create value. And with that, I'll turn the call over to our president, Mike Weinbach, to take you through our operating results.

Mike Weinbach -- President

Thanks, Jay, and good morning, everyone. I'd like to start by reviewing the Servicing segment on Slide 6. We reported pre-tax income of $318 million, which is up 39% year over year, reflecting a favorable environment with low prepayment speeds and strong credit, as well as the rapid growth in our portfolio and the operating leverage that resulted. Turning to the portfolio.

The Flagstar acquisition drove a substantial increase in scale. On the owned side, we acquired $59 billion in UPB, which is net of $18 billion we sold to subservicing clients with whom we have strategic relationships. With these sales, we were able to keep the incremental scale benefits by retaining the subservicing while providing a unique value-added opportunity to our clients. Our ability to arrange these kinds of transactions is a distinct competitive advantage as is the quality of our platform as reflected in the Freddie Sharp gold recognition for us and our clients that Jay mentioned.

In terms of the outlook, we're excited about the growth opportunities we're seeing in 2025. Market yields for MSRs have returned to normal levels, and there's plenty of competition, but we continue to see growth opportunities in correspondent and co-issue within our return targets. Also, we've started the new year with a small pipeline in bulk, which is now growing a little. And if originator profit margins remain under pressure, we'd expect to see rising activity levels throughout the year.

In terms of subservicing, the last year has been transformative. We've doubled in size, become the market leader in terms of share and has become the majority of our servicing book. There are a lot of factors contributing to our growth. Of course, the Flagstar transaction was a significant driver, and you can see this added $275 billion of UPB in the fourth quarter.

This will decline slightly in Q1 when all of the Flagstar transfers are completed as the transaction contemplated some of the loans moving to other servicers. Another driver of growth is new clients, and we were pleased to welcome new partners in 2024 and are in talks to add additional partners in 2025. But what we're most proud of is the organic growth in this business. Simply put, our clients are winning.

By leveraging our best-in-class servicing platform, they can focus on what they do best and whether that's asset management, retail originations or banking, they're growing faster than the industry overall, which is driving our joint growth. Turning to earnings. At current mortgage rates, the outlook is very strong through 2025 and well beyond as we continue to drive operating leverage in this business. For first quarter, we guide you to a range of $315 million to $335 million of EBT.

If you'll turn to Slide 7, I'd like to give you an update on AgentiQ, which you'll recall we talked about last quarter. AgentiQ is what's called an agentic framework application that's designed to assist our call center team members by analyzing conversations in real time. AgentiQ helps detect customer intent and sentiment trends, providing insights to support agents in delivering better service. We've trained the model on millions of customer calls, and this allows us to fetch relevant information and put it at the agent's fingertips, including suggestions for next steps, and of course, it generates a transcript and call summary, all of which is in compliance with applicable privacy laws and our responsible AI policy.

We piloted AgentiQ in the fourth quarter, and today, it's fully rolled out in the servicing call center, where it's now analyzing 400,000 calls per month, and we're getting very enthusiastic reviews from our team members, including both newer agents and veterans. Our customers benefit from improved experience with quick clear answers to their questions and a higher percentage of questions resolved on the first call. AgentiQ is also a powerful tool for management. For example, we now get automated summaries of topical issues in the call center, and we can drill down into specific issues with the click of a mouse, all the way down to individual calls.

This improves our compliance and quality control functions where we can now get automated summaries on individual customer engagement and cast a wider net with much higher sampling rates. Most important, this tool will accelerate our ongoing mission to identify customer priorities and develop better processes to assist them. And this may surprise you, but from the conceptualization of this tool to the full deployment, took less than a year. We have a very robust tech stack, excellent data standards and a supremely talented team of technologists.

We plan to roll out the AgentiQ to our originations team members a little later this year as soon as we complete a telephony upgrade. So now let's move on to Slide 8 and talk about Originations, where we generated $47 million in EBT consistent with the rise in mortgage rates during the quarter. I'd echo Jay that the highlight this quarter was continued incredible execution by our correspondent team who generated a 48% sequential increase in production following a very big third quarter. Thanks to their efforts.

Mr. Cooper is now a top five correspondent lender, which marks a significant improvement in share from a year ago when we weren't even in the top 10. As our efforts to reduce servicing costs improved our bids, we shifted energy to a series of enhancements to our platform. These included upgrading our pricing models, building out a new client portal, revamping our capital market strategies and relentlessly reviewing our relationship with every existing client and prospect.

The Flagstar acquisition also expanded our network of customers, particularly with banks and credit unions. The results speak for themselves, and I'll add that we're happy with our margins as well. Turning to Slide 9, let's focus on DTC, where volumes were up 16% quarter over quarter as we funded loans locked during the brief rally in third quarter. Just to put this in context of customer benefits, during the quarter, we helped nearly 2,000 customers lower their monthly payments, over 8,500 access equity in their homes and over 1,400 purchased new homes.

It's a company we feel great about delivering that kind of value to our customers. Now, you'll notice we had an atypical move in our refinance recapture rate, which dropped to 35%. And what's driving this is the impact of a single large portfolio with an unusual profile that we acquired last year. Specifically, it was an at-the-money deal, and we knew the originators would solicit their customers aggressively.

We priced the deal for limited recapture, and we included contractual safeguards to protect us against early payouts. While this didn't result in a material impact to our MSR value, it did impact the recapture ratio. Excluding this portfolio, our refi recapture would have been 53%, which is consistent with what we would expect given the heavier volumes of rate and term refinances in the quarter. Looking ahead, given the current level of mortgage rates, we guide you to $30 million to $50 million in first quarter EBT and potential upside later in the year, driven by the growth in our servicing portfolio combined with our focus on enhancing the customer experience.

For some perspective, 20% of our customers have note rates of 6% or higher, which means we're well positioned to capitalize on rallies, even if they're brief, just as you saw in the third quarter. Home equity is another growth driver. And here, the numbers are pretty interesting. 94% of our customers have at least 20% equity, and our average customer has nearly 50%.

This equates in theory to $675 billion in equity, which our customers could access should they want or need to monetize this value. Even in a higher for longer scenario, cash out refinances and home equity loans should be a steady recurring source of business for us and value for our customers. The last thing I'd like to cover is to share a little more information about the composition of our revenues related to Jay's comments about the growing importance of fee income coming from subservicing, master servicing and other client-related businesses. If you'll turn to Slide 10, you can see the percentage contribution of owned servicing, originations and fee income to our total revenue.

Fee income is generated by a number of businesses, the biggest of which is our market-leading subservicing platform, but other client service-related businesses contribute fees as well, including master servicing, special servicing, partnership and technology solutions in Xome. For 2024 in total, the service-related fee revenues totaled $500 million, which made up more than 20% of our total revenue, and this revenue stream has been growing at a double-digit pace for the last three years. Importantly, these businesses do not require any material capital or liquidity contributing to our growing return on tangible common equity. With that, I'll hand it over to Kurt.

Kurt Johnson -- Executive Vice President, Chief Financial Officer

Thanks, Mike, and good morning. I'll start on Slide 11 with a brief recap of our financials. To summarize, net income was $204 million, which included a positive $92 million mark net of hedge, $235 million in pre-tax operating earnings and adjustments of $39 million. Let me unpack those adjustments.

First, there's a $22 million charge for facility shutdown costs. Given our home-centric model, we significantly reduced our need for office space in the Dallas area, and we were able to negotiate very favorable terms to exit two large leases, which should provide us with meaningful savings going forward and funds to invest in renovating our headquarters, which will contribute to a more vibrant experience when we come together to collaborate and celebrate. Second, we accrued $18 million in connection with the court ruling and a lawsuit associated with the legacy business. Third, there was a positive $9 million reserve release related to the Home Point acquisition.

Then there were a few smaller miscellaneous charges. In terms of the overall operating results, Mike covered Originations and Servicing, and I would draw your attention to the Corporate segment, which incurred $51 million in expenses. Included in this number are some year-end incentive accruals, stock vesting and a small technology write-off, and Xome was a slightly larger drag this quarter. For the first quarter, we anticipate corporate expenses remaining at this level due to the timing of annual stock compensation before settling down to a more normalized run rate of $40 million to $45 million in the second quarter.

Turning to the mark-to-market line. We marked up the MSR to reflect rising interest rates and expectations for lower CPRs, leading to a quarter end valuation of 159 basis points of UPB or 5.5 multiple of the base servicing strip. Offsetting this gain were $581 million in hedge losses, which equates to 85% coverage, somewhat above our 75% target. We're extremely pleased with the hedges performance, which over the last seven quarters, has tracked the target fairly closely and contributed to stable and predictable results.

Now, if you'll turn to Slide 12, I'll comment briefly on credit. Our high-quality mortgage portfolio continued to perform extremely well, with MSR delinquencies up slightly by 11 basis points to 1.2%, a level that remains quite strong compared to peer and industry metrics. Low delinquencies reflect our thoughtful portfolio construction, which you can see in the rising FICO scores and declining LTV ratios for our customers, as well as our ongoing loss mitigation efforts, evident in a 47% year-over-year increase in loan modifications and workouts, which is a very important part of our mission to keep the dream of homeownership alive. We keep a close eye on Ginnie Mae delinquency trends, and we've noticed a small, but consistent deterioration in the industrywide performance across all product types and vintages, which is especially notable for loans which have already gone through modifications.

You can see this trend in our Ginnie Mae delinquencies, too. But I would note that this portfolio has grown by less than 4% in the past year, and today represents only 19% of our total loan portfolio, and thus is not a material exposure. Now, turning to Slide 13. Let me update you on our key balance sheet metrics.

We ended the fourth quarter with liquidity of $3.4 billion, which is down from the $4.1 billion in the third quarter as we utilized MSR lines to fund the acquisition of $1.3 billion in assets from Flagstar, which principally consisted of mortgage servicing rights. Liquidity consisted of $753 million in unrestricted cash, with the remaining in MSR line capacity, which is fully collateralized and immediately available. Our capital ratio, as measured by tangible net worth to assets, ended the fourth quarter at 24.4%, down from 27.9%, reflecting the increase in both MSR assets and higher loans held for sale due to strong correspondent growth. We are now operating comfortably within our target range, the level that we believe is appropriate for the current environment and mix of assets on our balance sheet.

On a final note, I'll comment that the 16% to 20% ROTCE range that Jay mentioned earlier is not reliant on expanding leverage or decreasing our robust liquidity. Thanks for listening to our report. And I'll now turn the call back to Ken for Q&A.

Kenneth A. Posner -- Senior Vice President, Strategic Planning and Investor Relations

Thanks, Kurt. And Marvin, could you now start the Q&A process?

Questions & Answers:

Operator

[Operator instructions] And our first question comes from the line of Terry Ma of Barclays. Your line is now open.

Terry Ma -- Barclays -- Analyst

Hey. Thank you. Good morning. Maybe just starting with the revised ROE target range.

You touched on it a little bit. But can you maybe just talk about the drivers that could get you to 20%? How much of the high end is actually kind of rate dependent? Or can you kind of hit that target even if we were to stay in this rate environment?

Kurt Johnson -- Executive Vice President, Chief Financial Officer

Terry, it's Kurt. Thanks for the question. I think we've touched on that a couple of times before, and I think Mike can go into it a little bit. But the services segment that we called out this quarter generates, obviously, fee-based income, which can generate a higher ROTCE, again, given that it's asset light in nature and equity light in nature.

That, and we've said the originations, as you saw in Q3, if we have a better originations environment, that's essentially fee-based income as well and so that could drive us to the higher end of the ROTCE. But the higher for longer environment works well for us, and we think we're going to be within that range regardless of what the rate environment looks like.

Jay Bray -- Chairman and Chief Executive Officer

I would just say, I would add operating leverage to that. I mean, if you think about the power of the organization. We added $440 billion of servicing in the last couple of years, and I think we added less than 20 people. So just wrap your head around that.

It's pretty incredible. It's a great job by Jay Jones and his team. And candidly, we think we're in the middle innings of that. We think there's tremendous leverage, tremendous cost and a better customer experience, and we're focused on that every day.

So I think that's going to be a key driver as well.

Mike Weinbach -- President

The last thing I'll just add is it's execution, it's not interest rates. So we're -- we feel really good about the balanced business model we can deliver on the return targets regardless of what's happening in terms of the interest rate environment, and we have a lot of momentum in just about every part of our business. So we've seen significant growth in our B2B origination as we talked about the huge increase in correspondent, seeing growth in our direct-to-consumer business. And we highlighted the home equity opportunity, which we think is quite significant.

And as Jay mentioned, we continue to execute on servicing, and there's validation, whether it's the Freddie SHARP Awards where we were super proud not just to win gold in the large servicer category, but to see clients for whom we subservice win gold in the medium and smaller servicer categories. So a clean sweep of the gold. So we're going to continue to focus on execution, keep the momentum. And if we do it well, we could be in the higher end of the range, and that's what we're working hard to do every day.

Terry Ma -- Barclays -- Analyst

Got it. And then, maybe just a follow-up on the services fee revenue. I'm just curious, can you kind of sustain that double-digit growth for that revenue stream going forward? And then, maybe just longer term, what's the steady state mix of services revenue that you're kind of targeting if there is a target? I mean, that's a higher multiple earnings stream in my view. So I would imagine you would want to maximize that somewhat.

Mike Weinbach -- President

Yes. I mean, I think what we're most proud of with our fee-based revenue that we showed, and we do often refer to it as services, is it's essentially taking all of the things that we're really good at and making it available to the rest of the industry. And we showed it to you as a percentage of overall revenue. And you asked about that.

But as we've talked about, there's some volatility in other parts of our revenue stream. You can see how big originations was in '21 and '22 and how much of that changed over '23 and '24, but the services revenue stream is quite steady and shouldn't have that level of volatility. So it's -- we think there's enormous opportunity to do more for the clients that we already work with. And there's a number of new clients that we're in discussions with to continue to grow that business.

So I guess, a long way of saying, yes, we do think we can sustain the growth in that business and see a lot of opportunity with it. And we agree with you. It's these businesses and other companies tend to attract a higher multiple than the high single-digit multiple forward earnings that we have today.

Operator

Thank you. And our next question comes from the line of Mark DeVries of Deutsche Bank. Your line is now open.

Mark DeVries -- Analyst

Thanks. Can you just talk about the pipeline for bulk MSR and the whole platform sales here? I mean, it seems like while you're now within the range on your tangible net worth assets, you still have a lot of capital flexibility. So just want to get a sense of how you're sizing up the opportunity set there and also as well, kind of what the returns look like? Are they still kind of accretive to that 16% to 20% range you've kind of targeted for the next two years?

Jay Bray -- Chairman and Chief Executive Officer

Yes. I think the bulk market, as Kurt mentioned, is coming back and certainly at attractive levels. And if you think about -- if we're in a higher for longer environment, I think that will certainly help the bulk market because you're going to see more originators that are going to need to sell. So we think that's going to grow throughout the year, and we are starting to see certainly more activity there.

And I think from an acquisition standpoint, in my view, I still fundamentally believe there's going to be consolidation in our industry. And you've seen us be very selective and very disciplined in looking at those opportunities. But I'm pretty bullish that there's going to be opportunities that are going to be attractive. And so, I think, again, consolidation will continue, and we will be a part of that.

Kurt Johnson -- Executive Vice President, Chief Financial Officer

And in terms of the returns, I mean, I think we're still seeing -- they may not be the cycle best returns that we saw a couple of years ago, but there's still solid risk-adjusted returns. Our hedging has held up really well. And so, we do think into that 16% to 20% range, as we're acquiring, and we've always said we're not going to chase yields, we'll be very disciplined about our purchases and we continue to be that way.

Mark DeVries -- Analyst

OK. Great. As you pointed out in the presentation, your special servicing business and digital real estate auction marketplace give you kind of a nice countercyclical revenue stream. Are you still thinking about potentially monetizing Xome if the revenue picture improves? Or do you just kind of like it now? Is that kind of countercyclical hedge?

Jay Bray -- Chairman and Chief Executive Officer

No. I think we -- look, Xome's done a great job at the end of the -- and we've made investments there. We've increased our market share. As the market turns, to your point, it is going to be a very valuable asset.

I think ultimately, we do think some sort of monetization makes sense for all or part of it, just to be able to capture all of our business as we've discussed, etc., etc. So I don't think strategically, our thoughts have shifted around them. We like the business. We're going to be patient.

We'll get the right value for it. But at some point, we will extract some value there.

Mark DeVries -- Analyst

Got it. Thank you.

Operator

Thank you. And our next question comes from the line of Crispin Love of Piper Sandler. Your line is now open.

Crispin Love -- Piper Sandler -- Analyst

Thank you and good morning, everyone. First on servicing expenses, you continue to drive efficiencies and improvements there. Expenses were at 5.3 bps of the servicing portfolio. As you look forward, do you believe that you can continue to drive that 5.3 bps lower through scale, tech, AI and other areas? Or is there a period where you expect that to flatten over time?

Jay Bray -- Chairman and Chief Executive Officer

No. Look, I think as I said, and Mike, please jump in. But I think, as I said earlier, we really believe we're in the middle innings of what's possible there. I mean, if you look at our '25 and '26 investments, they are AI centric.

They are process-centric where we're going to continue to be able to drive cost out. And Flash allow us to grow and continue to grow in a very scalable way. So we think there's a lot of opportunity there and we're making investments as we speak.

Mike Weinbach -- President

Yes. And I'll just add. The level of investments that we're making in technology is increasing. And we feel more comfortable investing more because the team has executed so well.

And so, all the things you mentioned, scale, continued investment, just relentlessly waking up every day, thinking about how we can do things better for our customers, how we can let customers do things for themselves that they want, how we can make our team members who serve our customers more effective. It's all those little things that are adding up to the improvements we're seeing, and we're bullish on the opportunities ahead of us.

Crispin Love -- Piper Sandler -- Analyst

Great. I appreciate that. And then, following up on the new ROTCE guide. Last quarter, you said you were very comfortable at the midpoint of the prior guide, which would have been about 16%.

Would you say you're comfortable on hitting the midpoint of the new guide for 2025? Or should it be upward sloping over the next two years and, of course, being rate dependent. And just curious on what you view as some of the major changes from three months ago to today just driving that guide?

Kurt Johnson -- Executive Vice President, Chief Financial Officer

Yes, it's a great question. So I mean, I think we've said that we're 16% to 20% for the two years. That doesn't mean that every quarter is going to be at the midpoint or above or potentially even at the low point. But we're comfortable in the 16% to 20%.

I think what you're seeing is we're adding that incremental business from a services perspective. We're driving that incremental scale from an operational efficiency perspective and we're just going to continue to work on that day after day after day. It's what we've done, it's what we're good at. And I think you'll see that ROTCE sort of climb over the course of the two years as a result of all of that.

Operator

Thank you. Our next question comes from the line of Doug Harter of UBS. Your line is now open.

Douglas Harter -- Analyst

Thanks. Can you talk about your capacity in the Origination business and the ability to maintain recapture rates if and when we see the next refi opportunity?

Mike Weinbach -- President

Yes. As we've talked about in -- through most of 2024, we kept a little bit of a buffer capacity to be able to handle expected dips in rates. And we saw in September when rates dropped, we were in position to be able to capitalize on it and saw a nice increase in our rate term refi originations and our earnings. And as rates have risen and the rate term opportunity has become much smaller, we again have excess capacity, and we're working hard to fill it.

The big opportunity that we see, and we saw it in the quarter and we're already seeing it in the early part of the first quarter is with home equity. The majority of our portfolio, our customers still have rates below 4%. And as home values have increased, the amount of equity in their home has grown with it. So for customers that are carrying credit card debt, they want to do home renovations.

They want to consolidate other debt. Home equity represents a great opportunity. And we've grown -- this is a product that we launched two years ago, and it's grown steadily since launch. But if we look at where we are, we're still -- the majority of our customers that are getting home equity loans, they're still getting away from us.

So we see enormous opportunity to help our customers and we're making investments and enhancements in the products every day and it's becoming an increasing share of what we're doing, and we feel confident that we'll be able to fill the capacity with new products that meet our customers' needs. And we like the idea of continuing to keep a buffer through this year because rates will be volatile and we want to be ready to capture the opportunities when they come.

Jay Bray -- Chairman and Chief Executive Officer

The only thing I would say, Doug, to that is like -- and we haven't talked as much about the investments that we've made in the origination platform as we have in servicing. But over the last few years, we've made significant investments in the origination business, effectively componentizing almost every aspect of the origination process. So our ability to scale today is night and day compared to where it was two years ago. And the team has done a good job there.

But we can scale up pretty quickly now with the investments we've made. And we continue to make those in this year and next. So we're only going to become more efficient and more scalable there.

Douglas Harter -- Analyst

Great. Thank you, guys.

Operator

Thank you. Our next question comes from the line of Bose George of KBW. Your line is now open.

Bose George -- Analyst

Hey, guys. Good morning. On the corresponding market share, obviously, it's up meaningfully. Do you see room for share to increase further from here? Is this kind of a good run rate? Also should we think about one more month of Flagstar production since that deal closed end of October?

Jay Bray -- Chairman and Chief Executive Officer

Yes. I think -- good morning, Bose. I think on the correspondent, absolutely, you should expect us to continue to grow that and grow share. I mean, it's really not super complicated, right? At the end of the day, we're going to continue to focus, like we said, on our scale and our cost leadership.

So we're driving costs down, continue to focus on retention. And we're ultimately, we think, the best buyer of MSRs. And so, with the power of the platform now and the scale of the platform, we think there's going to be a lot of opportunity to continue to grow correspondent at very attractive returns. And you can comment, Kurt, more.

Kurt Johnson -- Executive Vice President, Chief Financial Officer

On Flagstar. Flagstar is pretty simple, which is, yes, we closed October 31. So we had two months in Q4, about, three months in Q1. So a pretty simple answer, I think, to that, Bose.

Bose George -- Analyst

OK. Great. And then, it looks like you recently sold the Flagstars' PPO business. Is that -- did that not fit into what you guys want to do on the Origination side?

Jay Bray -- Chairman and Chief Executive Officer

Yes. We look -- and Mike, you can jump in, but we look at that, took a hard look at it and thought about it strategically. But yes, ultimately made a decision that the broker channel was not something that we wanted to move forward with. Yes, and having said that, we were very, very intentional about finding a great partner and finding a home for the team members.

And so, that was a real commitment that we made to the Flagstar team members and Mr. Cooper team did a great job on that. And we feel like India is a great home for them and good things will happen there. But that's how we thought about it strategically.

Bose George -- Analyst

OK. Great. Thanks.

Operator

Thank you. Our next question comes from the line of Derek Sommers of Jefferies. Your line is now open.

Derek Sommers -- Analyst

Hey. Good morning, everyone. I know you guys don't disclose margins by channel, but just given the kind of channel mix shift. Could you provide some directional color on how those trended and kind of how we should think about that in the near term?

Kurt Johnson -- Executive Vice President, Chief Financial Officer

Yes, Derek, I'll take it. Look, realistically, from the fourth quarter to the first quarter, the margins didn't really change materially. They -- channel by channel, they were about consistent and they've been consistent. Even in the drop in rates at the end of Q3, we didn't see a real increase in margins.

So we've seen pretty consistent margins hold, and that's by product and by channel all the way through.

Derek Sommers -- Analyst

Got it. And I know historically, you guys have targeted a 50-50 mix of subservicing and owned MSR. But kind of given where the portfolio sits in your earlier comments, about increasing wallet share among subservicing clients. Should we kind of think about that target changing a bit?

Mike Weinbach -- President

Yes I mean, you see the shift where we're now larger in subservicing than we are a known servicing. And as I mentioned in some of the upfront comments, we're seeing really strong organic growth in that business. So a lot of the big increase that happened was due to Flagstar, but what we feel best about is the clients that use us for subservicing are benefiting from our superior efficiency, quality, the customer experience, and they're seeing their business grow more quickly than the rest of the market. And we're going to be there as a partner to grow with them.

And so, we may see the percentage of subservicing grow a little bit more quickly than own servicing, which obviously requires capital liquidity, use of our balance sheet. But we see opportunities for growth in both parts of the business, frankly.

Derek Sommers -- Analyst

Thank you. That's all for me.

Operator

Thank you. Our next question comes from the line of Eric Hagen of BTIG. Your line is now open.

Eric Hagen -- Analyst

Hey. Thanks. Good morning, guys. When we think about the inputs and assumptions used for the MSR valuation, can you remind us if there's a recapture estimate, which is factored into the fair market value? And then, along those same lines, I mean, I noticed that you guys use an option-adjusted spread is one of the key inputs to that valuation.

Hopefully, without maybe going down a complicated rabbit hole. Is there a way to think about the spread in this rate environment? Just how sensitive it is to rates or other conditions in the market?

Kurt Johnson -- Executive Vice President, Chief Financial Officer

Eric, it's Kurt. So I'll try not to take us down the rabbit hole here because I'd love to do it, and I won't do it here. But, yes. I mean, we do factor in recapture into our value, but the reality is that recapture, whether it's implicit in -- or explicit in the model or implied because of the discount rate is in everybody's model because that's the way that the MSR is traded these days.

And in terms of option-adjusted spread, yes, we moved to that model almost three years ago now. And realistically, for a lot of the loans that are for coupon and lower, the optionality of those loans doesn't factor into it at all. So you're looking at essentially just a straight fixed yield that doesn't vary all that much. Whereas on loans that are closer to out the money, you see the option adjusted spread kind of widened a little bit, and that's the way that we look at the portfolio and that's why we were purchasing a lot of deep discount loans in '22 and '23.

Eric Hagen -- Analyst

OK. Great. Interesting color. How do you see any dismantling of resources at the CFPB maybe changing your business maybe in either direction?

Jay Bray -- Chairman and Chief Executive Officer

Look, I think our view is, as you know, consistently, we're going to work with the regulators. We view them -- the way they think about goals of helping customers is the same as the way we think about it. So we will obviously be very involved and engaged, but I mean, we don't see anything changing imminently with them, and we'll kind of navigate that as things unfold.

Eric Hagen -- Analyst

OK. Appreciate it guys. Thank you.

Operator

Thank you. Our next question comes from the line of Mikhail Goberman of Citizens JMP. Your line is now open.

Mikhail Goberman -- Analyst

Hey. Good morning, guys. Thank you. If I could just follow up on the range that you guys -- so the guidance that you provided for originations of $30 million to $50 million in the first quarter.

I guess thinking, what would need to happen for you guys to sort of hit the upper end of that range? Would it be a continued momentum in a fantastic quarter you guys had in the fourth quarter in the correspondent space? Would it be an increase in the DTC space? And how do you guys kind of think about the mix between those two? And what would cause you to hit the upper band of that range?

Mike Weinbach -- President

Yes. I mean, the short answer is the biggest driver would be a drop in interest rates. The corresponding business is going to continue to grow. It's relatively low margin, so it makes up a smaller part of the originations earnings, but it is a really important part of feeding, our servicing business.

For our direct-to-consumer business right now with mortgage rates over 7%, there really isn't any rate-term refinance opportunity to speak of. We feel good about being able to operate within the guidance range based on the opportunities we have to help our customers take advantage of the equity they have in their homes through cash-out refinances and through home equity, as well as purchase. But if there were -- it happened very quickly in September, if there were a rate drop like that, we'll be standing by, ready to help customers take advantage of it, lower their monthly payments. And that should add a lot of value for our customers and for our originations business.

Jay Bray -- Chairman and Chief Executive Officer

I will say, the quarter. I mean, we are seeing positive results in DTC. And we -- and to Mike's point earlier, from a second lien standpoint, we've seen a lot of -- we've made a lot of progress there, and we're growing that business and we think there's a massive opportunity. So I think that -- those could be some drivers as well to kind of -- as you think about the range.

Kurt Johnson -- Executive Vice President, Chief Financial Officer

Yes. And we've really only been in the second lien product in any material way for about a year and a half, and investors are now getting more and more comfortable with the product that we're delivering because it is all from our customers. So we know the performance and the performance has been excellent. We're getting great execution.

And I think more and more, that's allowing us to give great prices to our customers, which is just going to accelerate that cycle.

Mikhail Goberman -- Analyst

Great. Thank you for that color and best of luck going forward.

Kurt Johnson -- Executive Vice President, Chief Financial Officer

Thanks, Mikhail.

Operator

Thank you. Our next question comes from the line of Giuliano Bologna of Compass Point. Your line is now open.

Giuliano Bologna -- Analyst

Good morning. Congratulations on the continued incredible performance. The first question I have, and hopefully it's not too complicated, but if I assume you're at the midpoint of the 16% to 20% or call it, 18% ROTCE, even if you're buying back a couple hundred million dollars of stock and originations are growing. You'd still be delevering unless you're growing the MSR book somewhere in the teens and probably even as high as the mid-teens.

So I'm curious when you think about the growth in UPB and the growth in your servicing UPB. Yes. Should we be thinking about it in terms of like low double digits, mid-double digits, could it go higher? I realize that the market is changing. There's probably less bulk deals and you're going to be a bit more focused on correspondent.

But just trying to think about roughly where you think the growth rate of UPB should be in the -- at least in the near to medium term?

Kurt Johnson -- Executive Vice President, Chief Financial Officer

Giuliano, it's Kurt. Thanks for the comment and for the question. I think you're right. I think looking at it in kind of the growth in the low double digits.

But as we said earlier, we're not going to be chasing yield. And we know -- I mean, obviously, our stock has performed really, really well, and we're pleased with that, but we're still trading at about an eight times forward PE. So we still are going to be active investors in kind of repurchasing stock. And to your point, if we're not seeing great opportunities now, we use the opportunity to delever a little bit, keep some dry powder and be ready for when things improve again.

And so, while we have that in our plan in terms of kind of low double-digit growth, we're going to be opportunistic around it.

Giuliano Bologna -- Analyst

That's very helpful. And then, thinking about the origination side, UPB is up 57% this year. And that's obviously the DTC channel is internally focused. So I would assume that you should still have some pretty strong growth as you kind of integrate the Flagstar portfolio and kind of stabilize the portfolio you've acquired and start working on recapture opportunities within that book.

Is it fair to assume you still grow even regardless of the rate environment over the next few quarters? And then, there's -- I'm curious what would really move the needle in terms of accelerating DTC growth? Would you need kind of 50 basis points, 100 basis points or any kind of level where you see a real acceleration in the DTC volumes in your opinion?

Mike Weinbach -- President

Yes, Giuliano, I mean, the short answer is yes. There's wind at our back as the portfolio continues to grow. So we'd expect growth throughout the year. And it's the opportunities beyond that are very much the things that we talked about.

Continued execution, the huge opportunity that we see in home equity, we're making investments in the scalability of the business. We're continuing to drive our cost leadership there. So we expect our cost to originate to go down over the course of the year. If and when rates do drop, and we start to use our capacity, we're now able to add new people and get them ramped up much more quickly than we used to be able to in the past.

We're investing in digital self-service tools. So customers can help themselves. We're investing in automation. So you put the growth in the portfolio with the investments we're making and we feel really great about the opportunities we see ahead in this business.

Giuliano Bologna -- Analyst

That's very helpful. I appreciate the questions and I'll jump back in the queue.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Ken Posner for closing remarks.

Kenneth A. Posner -- Senior Vice President, Strategic Planning and Investor Relations

Great. Thanks very much for joining us. And if you have follow-up questions, please reach out to the investor relations team. We're here to answer them.

Thank you.

Jay Bray -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Kenneth A. Posner -- Senior Vice President, Strategic Planning and Investor Relations

Jay Bray -- Chairman and Chief Executive Officer

Mike Weinbach -- President

Kurt Johnson -- Executive Vice President, Chief Financial Officer

Ken Posner -- Senior Vice President, Strategic Planning and Investor Relations

Terry Ma -- Barclays -- Analyst

Mark DeVries -- Analyst

Crispin Love -- Piper Sandler -- Analyst

Douglas Harter -- Analyst

Doug Harter -- Analyst

Bose George -- Analyst

Derek Sommers -- Analyst

Eric Hagen -- Analyst

Mikhail Goberman -- Analyst

Giuliano Bologna -- Analyst

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